Banks from Northern Europe are offering...the safety of having your money parked in large, well-capitalized institutions based outside Europe's danger zone. The campaigns aren't subtle: HSBC Holdings PLC promotes its "safety and security" in Greece...
In Italy, consumer group Altroconsumo has been offering advisory services to jittery depositors since December. As a precautionary measure, the group is recommending that customers consider moving their deposits from domestic Italian banks to foreign banks that operate in Italy...
In Greece, HSBC's local unit is trumpeting "the safety and security of the bank with the greatest capitalization in Europe." The bank, with 16 branches scattered around Greece, is offering depositors 3.5% interest if they lock up their money for at least six month...
Foreign banks are offering competitive prices and the allure of safety. Barclays recently launched its new "depositos solvencia" Spanish savings productWhy is this good news, you may ask? It's just feeding the run away from local banks, which have invested heavily in now-tanking local economies and loaded up on sovereign debt.
Here's the answer. My favorite solution for Europe is sovereign default and keep the common currency. (Actually, that's my second favorite. Free market reforms tomorrow, start growing like China on Monday and pay back the debt is my real favorite, but we can only dream so much.)
The natural rejoinder is, what about the banks? Since the local banks have all loaded up on sovereign debt, then the banks will all go under, and won't that be a disaster?
My response has been to remind people of the difference between existing banks and a functional banking system. Countries need a functional banking system. They do not need all of the existing banks to continue, nor do they need all of the existing bank's creditors not to lose a cent.
Europe offers a particularly good playground here, because it's supposedly an open market. Greece is about the size of metropolitan Chicago. It can function well as Chicago does, with banking dominated by local branches of diversified international banks. If the local banks fail, that does not mean Greece will not have a banking system. Just transfer the assets and deposits of failed banks to HSBC, put up a new sign on the front window, and open for business.
And this news adds important facts to my scenario. Those large banks are already operating in Greece, Spain, and Italy and ready to take over.
Of course I am guilty of a bit of wishful thinking here. The article also shows how local banks are fighting back to keep their deposits. And it can't be long before local governments intervene to "save our banks from destructive international competition." In fact, the localization of bank regulation is one of the sadder parts of this whole mess. Had Europe really gone for a europe-wide banking system in the first place, that system would be in a lot less mess now.
Side note: The US discussion is all full of "the financial crisis proves we need more regulation." Europe's banks woes are entirely the product of regulation. What's failing is sovereign debt, debts of the governments that regulate things, not mortgage backed securities put together by greedy wall street bankers. The banks are full of sovereign debt because their regulators told them to do it, not because sneaky financial engineers got them to do it. Here is the fully regulated system on display for us.